The actual allocations will naturally drift as a result of each manager’s individual performance, so we allocate each day’s cash inflows based on how far each sub-advisor is from their target allocations. Thus, the sub-advisor who is furthest below his or her allocation will get the most money; the sub-advisor who is next furthest below will get the second largest amount and so forth.
If the sub-advisors have drifted from their allocations based on their performance relative to each other and this can’t be corrected from new cash inflows we will consider rebalancing. However, the allocation will have to drift materially before we would rebalance. Typically we wouldn’t rebalance unless one or more sub-advisor’s allocations were at least two percentage points off target, and even then we would only move cash reserves if available. If a rebalancing required stock to be sold we would consider this only if the sub-advisor was at least four percentage points off target, and even then we reserve the right to use our judgment. We have rebalanced a number of times in several of the Litman Gregory Masters Funds but we have never had to force stock sales to do so.